Fixed Income

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Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

Fixed Income

Postby pooja923 » Mon May 16, 2016 3:15 pm

Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently four and one-half percent? (For simplicity, assume annual payments.)
    1. $1,052.17
    2. $1,044.33
    3. $1,068.72

The correct option is option 3 ($1,068).
If we caluculate using calculator: n=10, r=4.5% pmt= 70 FV=1000 CPT PV= -1197.82
Kindly explain how to solve this.

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Posts: 871
Joined: Wed Apr 09, 2014 6:28 am

Re: Fixed Income

Postby edupristine » Tue May 17, 2016 8:03 am

Hi Pooja

Each of the remaining cash flows on the bond is discounted at the annual rate of 4.5%

period Payment Discount PV
1. $1000*7%=$70 (1.045)^1 $66.99
2. $1000*7%=$70 (1.045)^2 $64.10
3. $1000*7%=$70 (1.045)^3 $61.34
4. $1000*7%=$70 (1.045)^3 $876.30
Total present value of cash Flows= $1068.73

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